Infomatic Specialists Inc. (ISI), which develops software for the health care industry, was founded five years ago by Juan Benitez and Peggy Stark, who are still its only stockholders. ISI has now reached the stage where outside equity capital is necessary if the firm is to achieve its growth targets yet still maintain its target capital structure of 60%equity and 40% debt. Therefore, Benitez and Stark have decided to take the company public. Until now, Benitez and Stark have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy.

Assume that you were recently hired by Arturo Anderson & Company (AA), a national accounting firm, which has been asked to help ISI prepare for its public offering. Mattie Millard, the senior AA consultant in your group, has asked you to make a presentation to Benitez and Stark in which you review the theory of dividend policy and discuss the following questions:

(3) What are the advantages and disadvantages of the residual policy? (Hint: Dont neglect signaling and clientele effects.)

4. What are some other commonly used dividend payment policies? What are their advantages and disadvantages? Which policy is most widely used in practice?

5. What are dividend reinvestment plans (DRIPs), and how do these plans work?

6. What are stock dividends and stock splits? What are the advantages and disadvantages of stock

   dividends and splits? When should a stock dividend as opposed to a stock split be used?

7. What are stock repurchases, and why are they used? What are the advantages and disadvantages of

   stock repurchases?